Why do so many Americans want a gold-based currency?

Summary: Periods of economic stress tend to bring forth quack simplistic economic theories, like during the 1930s. We will see more of these if this slow period continues, more so if we have another recession before a recovery. Not just gold, but other fringe ideas such as Ayn Rand and her mutant version of Marx’s labor theory of value (with “going Galt” as their form of collective labor action). This is part one of a series about the theory and the history of gold-based monetary systems. Part 2 is What would a gold-backed currency do to America?

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If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.

Contents

Gold, a vice around the economy’s heart

Does gold stabilize the economy?

Why do many people want a gold-backed dollar?

For more information

(1) Gold, a vice on the economy’s heart

This love of gold goes to the central flaw of laypeople’s thinking about economics. Fixed is not always good. Economic variables have to vary. It’s usually better for interest rates and currency values to change rather than shocks flow through to national income and employment. To use a bad medical analogy, why don’t we all get pacemakers to stabilize our heart rate! Imagine how a fixed pulse would improve our health, especially during sex and other forms of vigorous exercise.

Many of the past century’s successful economic outcomes occur in nations whose leaders understood this. Many failures occur in those that didn’t.

The case history most relevant to us: the late British Empire. In 1924 they made a horrible mistake, appointing Churchill as Chancellor of the Exchequer. Knowing nothing about finance — and that a strong currency is obviously and always good — in 1925 he repegged the pound to its 1914 value. Since the UK was far weaker in 1914, that initiated a series of currency crisises lasting until the final IMF bailout in 1976 (the largest until then). In exchange this loan the IMF demanded a final large devaluation (see this UK government paper about the event). This set the stage for the “Thatcher miracle”, as Volcker’s breaking inflation did for the “Reagan Miracle”.

He loved the Empire, and did more than any other Brit to destroy it.

We’re repeating Churchill’s mistake, due to a similar imperial ignorance. The US dollar is too high vs. the currencies of our trading partners, with the same result: ugly trade deficits, outsourcing, and deindustrialization. Eventually reality will hammer the US dollar (or US national income) down, as it did the to Britain. If we’re not smart and take the easy way, events push us on the hard path to the same outcome.

For an brief explanation of the problem with gold-based monetary systems see “Golden Instability“, Paul Krugman, New York Times, August 2012 — Excerpt:

There is a remarkably widespread view that at least gold has had stable purchasing power. But nothing could be further from the truth. Here’s the real price of gold — the price deflated by the consumer price index — since 1968 {graph}

… What does that tell us about how a gold standard would work? Faced with the kind of shock we’ve just experienced, the real price of gold would “want” to rise. But under a gold standard, the nominal price of gold would be fixed, so the only way that could happen would be through a fall in the general price level: deflation.

So if we’d had a gold standard operating in this crisis, there would have been powerful deflationary forces at work; not exactly what the doctor ordered.

Now, the gold bugs will no doubt reply that under a gold standard big bubbles couldn’t happen, and therefore there wouldn’t be major financial crises. And it’s true: under the gold standard America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933. Oh, wait.

The truth is that returning to gold is an almost comically (and cosmically) bad idea.

Magic! Like elves in the forest.

(2) Does gold stabilize the economy?

The gold standard has horrific effects on the US during the late 19th century. Our histories are written from the perspective of creditors, for whom the Gilded Age was a wonderful period of growing and concentrating wealth and income. Those years look wonderful because we’ve airbrushed them as carefully as Playboy does their centerfolds. Ignorance sells!

In fact there were frequent depressions — with no food stamps, unemployment insurance, or medicare. Our “yeoman” classes that Jefferson saw as the foundation of the Republic (independent small merchants, farmers, craftsman), were liquidated during these depressions. Even children’s stories like Little House on the Prairie to see the pain it caused. And the resulting social turmoil.

Nor does gold prevent the formation of financial bubbles, which are an inherent aspect of free-market economies — and can occur even without credit. Although on a gold standard 19th century Britain had many bubbles, each of which painfully bust. For an introduction to this history see “Charles Mackay’s own extraordinary popular delusions and the Railway Mania“, Andrew Odlyzko (Professor, U MN), 14 September 2011. Odlyzko shows how bubbles look sensible at the time, until their underlying assumptions prove wrong over the short-term — even if they prove to be correct over the long-term.

The gold standard worked for the UK because its leaders allowed the Bank of England to break its bonds during emergencies. For more about this see these articles by Brad Delong (Prof Economics, Berkeley):

Why do they want something with a history of painful failure? Why is the most difficult of questions to answer. This comment by revelo gives as good an answer as any I’ve seen:

The answer is that gold is a symbol or metaphor for what people really want, which is stability and security and a return to the good old days of the 1950′s, when American blue-collar workers had a bright future to look forward to, as opposed to a future in which American blue-collar wages must eventually fall to the level of developing world wages.

No one is actually going to give these fools a gold standard, but promises of a gold standard may very well win some votes. Then again, the question was rhetorical and doesn’t need to be answered, since everyone already knows the answer is more or less what I just wrote.

98 thoughts on “Why do so many Americans want a gold-based currency?”

Note the limitations of the format: posts can be either deep examination of narrow topics OR broad but shallow surveys — due to the max post size of aprox 1,000 words, above which readership falls off rapidly. Hence the links to more information — deeper, authoritative sources — at the end.

(2) As for unconvincing” as we have discussed on the FM website so many times, a characteristic of believers of faux economics is that they’re immune to facts or logic. No matter how factually incorrect their beliefs — eg, that there were few or no bubbles in economies under gold standards — they remain true believers.

For more about this see Eric Hoffer’s The True Believer: Thoughts On The Nature Of Mass Movements (1951).

Welcome to the FM website! Every website has its own culture. Some are like the corner pub, warm and fun. People sound off about their beliefs and feelings; it’s a safe place to share. Logic and facts are checked at the door.

Other places are like a retreat at the top of a mountain. It’s a harsh place where people meet to discuss truths. If you say something is so, you might be asked to provide support. Your logic will be examined, even dissected. It’s nothing personal.

The little “I like” and “I don’t like” that are fun elsewhere are considered graffiti here. Fingerpainting (share your feelings, children) instead of reason, greeted by laughter. Different places, different ways.

Move to krugman’s summary and last statement — he has a habit of preaching the “truth” to others simply because he says it’s the truth. Then there’s the references to pacemakers and sex. Finger painting at it’s best, sir — and lack of depth or understanding.

The problem with a gold standard is that it works — go ask mr. Krugman about the national debt, tax hikes disguised as inflation and central economic planning by un-elected central bankers. Fun guys. Or, just wait a few years and enjoy his road to serfdom — it’s a one way street. Surprised to read that you are drinking his spoiled coolaid — sweet to drink, but acid on the stomach. Especially when the the waiter brings the check as the bill comes due.

If you don’t know that Playboy models are airbrushed, then I recommend doing research. Or is the metaphor of “airbrushed history” not clear to you?

(3) “Move to krugman’s summary and last statement — he has a habit of preaching the “truth” to others simply because he says it’s the truth.”

Agreed. It’s a common trait of academics when describing their theories. Not attractive, IMO, but this stylistic excess doesn’t make them more or less correct.

(4) Then there’s the references to pacemakers and sex. Finger painting at it’s best, sir — and lack of depth or understanding.”

Are you a fashion editor? These are all objections to the style of the post, its form of expression — not the content. A few phrases in a 1300 word post! If you prefer dry detailed analysis from experts, read the articles listed in section (a) the For More Information section. That’s why they’re there.

What does that mean? Most systems “work” in some sense. The effects of the gold standard in the 19th century generated a great deal of unnecessary depressions. Tomorrow’s post discusses the effect of the gold standard during the 1930s — definitely not “works”.

(2) “go ask mr. Krugman about the national debt”

Nations can amass large debts under any economic system, including the gold standard. England amassed massive debts during its wars. Phillip II had much of the world’s gold and went broke. Twice. For details see:

How strange a comment. The post-WWII era of modern economic management saw both rapid growth AND low economic volatility — unique in our history. We had only two slight, brief recessions in the 25 years between 1982 and 2007. Which ended in part due to the massive financial deregulation and fiscal deficits of Bush Jr.

Since WWII the world has seen some of the fastest economic growth ever, perhaps back to the invention of agriculture.

(5) “Or, just wait a few years and enjoy his road to serfdom — it’s a one way street.”

Krugman also has a habit of being proven right by his events. In the past few years his critics have consistently been proven wrong. About the economy’s response to the stimulus. That the stimulus was too small, so the recovery would be slow. That there would be no big inflation or hyperinflation.

As a businessman, Ben Franklin made a vast fortune (for that time and place). He was America’s most famous scientist and inventor. America’s first Postmaster. A noted political theorist. Governor of Pennsylvania.

His work cited here showed that much of modern monetary theory was known to practical men even centuries ago (tomorrow’s post cites Newton), although it’s lost to today’s gold bugs.

The answer is that gold is a symbol or metaphor for what people really want, which is stability and security and a return to the good old days of the 1950’s, when American blue-collar workers had a bright future to look forward to, as opposed to a future in which American blue-collar wages must eventually fall to the level of developing world wages.

No one is actually going to give these fools a gold standard, but promises of a gold standard may very well win some votes. Then again, the question was rhetorical and doesn’t need to be answered, since everyone already knows the answer is more or less what I just wrote.

I have to disagree with revelo. I talk fairly frequently with a number of gold bugs and their feelings go way beyond his comment.

The reason the gold bugs covet gold is that they have lost their faith in government to be wise stewards of the common good and continually search for a greater truth than the wisdom of government bureaucrats. In many cases they put their faith (note the word, it is important) in something that predates the Federal Reserve Bank and would survive the sudden collapse of the current monetary regime.

Many (most?) of the goldbugs take it as a matter of faith (there’s that word again) that the US government is no longer capable of making good decisions because of the power of special interest groups and seek to weaken the ties between the US government and the economy so they personally can survive the death-throes of a bloated government gone mad.

This particular form of monetary religion (it is supported only by the faith of people looking for a solution in a world they view as increasing off-track and insane) is one of the core beliefs of the Tea Party. I have argued at length with them, pointing out that the Romans suffered crippling inflation during certain periods of their empire. The goldbugs respond that the Romans made the classic mistake of trusting the government to mint coins without secretly devaluing the coins and the Romans would have done better to have stayed on the barter system.

Arguing with them, my good FM, will only bring the very considerable might of their misguided righteous fury upon your head, and you deserve far better than that.

I see Pluto’s comment as consistent with revelo, and more detailed. There are, I believe, two more aspects to Pluto’s analysis.

(1) This loss of faith didn’t just happen. Nor do people so deeply indoctrinated as Fred, with so much carefully crafted misinformation, just happen. This is the result of a long and well-funded project. I’ve written must about it. Here’s the latest, very relevant to this discussion: Undercutting people’s trust in the Republic: another step to destroying the Republic.
(2) What government actions led these people to lose faith in the US government? Its not as if US history is a horror show, like that of so many other nations. Defeat at war, leading to occupation, poverty, revolution? Massive economic failure (people throughout history would laugh at the those that decade of no economic progress was horrific)? Policies leading to massive social unrest (riots, strikes, rising crime)? No to all.

I believe the key event is the long march of Federal actions ending oppression of Black Americans, starting with Executive Order 8802 in June 1941, culminating with the 1964 Civil Rights Act, and the subsequent legislation and Federal enforcement actions. This was a massive shock to a large fraction of the American people. A betrayal of their values, even oppression. The loss of faith in the Federal government is just one of the many deep responses to it.

As a bit of visual evidence, see the photo below of our aspiring gold-bug-in-Chief, Ron Paul, speaking at a Southern Historical Conference in Schertz, TX, on 29-30 August 2003. Note some of the key points he makes:

His glowing statement that free nations allow people to leave — oblivious that the State whose flag he stands before denied exactly that right to its slaves.

His enthusasim about “consent of the government” — oblivious that the Confederacy’s slaves gave no consent to their oppression. Slaves were probably a majority in South Carolina and Mississippi.

His easy believe that slavery would have ended eventually. What’s a few more generations of slavery?

We have a winner with the crazy over the top statement of the day. 24 hours of real slavery would teach Alex some useful lessons about history and life.

(2) “Slave didn’t. But at least free people did.”

“But at least“. Wow. This is beyond comment, making my point better than anything I could possibly say. Guessing, Alex probably finds it odd that discussions about the antebellum South always mention slaves — and ignore the wonders of their white culture.

I find it add that any discussion about State Rights, Property Rights and freedom from the oppression of central government immediately got turned by smear masters and speech control specialists into “slavery issue”.

I don’t know why you do it, FM. Most of the people who do it are professional from different Non-Governmental Organizations (subsidized by the government). Their goals are understandable.

Even odder that someone considers irrelevant references to one of the most traumatic and formative political events in US history, whose last phase occurred during the lives of the Boomer now running America, and whose echoes still shape policy debates (explicit mentions of State’s rights, repeal of the 1964 civil rights acts, and the current court battles over attempts to de facto repeal the voting rights act).

My guess is that such complaints are another example of attempts to put blinders on our eyes and control our discussion. They seek to make into crimethink mentioning these powerful but painful factors, least their exposure to daylight arouse the American people.

Correct me if I am wrong, but I seem to remember that voting rights in the USA were restricted according to how much taxes a person paid or how much wealth a person possessed till shortly before the civil war.

The defaults of Philip II have attained mythical status as the origin of sovereign debt crises. We reassess the fiscal position of Habsburg Castile, deriving comprehensive estimates of revenue, debt, and expenditure from new archival data. The kingâ€™s debts were sustainable. Primary surpluses were large and rising. Debt/revenue ratios were broadly unchanged across Philipâ€™s reign. Castilian finances in the sixteenth century compare favorably with those of other early modern fiscal states at the height of their imperial ambitions, including Britain. The defaults of Philip II therefore reflected short-term liquidity crises, and were not a sign of unsustainable debts.

The other people in this dialog are, like you, are busy people tuning in and out of this. Blocks of text like yours don’t help.

(2) What’s the point of this quote? From memory, most bankruptcies result from short-term liquidity crises, as do almost all depressions. Europe today has a short-term liquidity crisis, as their debts and trade balances are sustainable (excluding Greece, of course).

This excerpt posted by Fred illustrates the opening comment in this post, about the layman’s common belief that fixed is good. I don’t have time to discuss in the detail it deserves, but briefly…

Households or businesses that have short-term liquidity crunches get little sympathy, and their fate usually does little economic damage (except for banks, and in large-scale downturns). But for governments its a different story. Both Phillip II and nations in the great depression (see the next post) had tolerable debt loads. But their gold standards denied them the flexibility to deal with shocks. Phil defaulted. In the early 1930s nations suffered, some spiraling into fascisim. Once they went off their gold standards, they had the ability to stimulate their economies and start recovery.

That’s why analysis of monetary systems so frequently focus on Phillip II, the 19th century booms and busts, and the Great Depression — all examples of unnecessary suffering. Pain is not therapeutic.

Hardly claim to understand finance, but don’t we import more than we export? Oil, cars tv’s ect,? If we were on a gold standard it would appear we in the US would shortly have no gold?
To maintain a balance on a strict gold standard would you have to end most trade between nations, quit importing oil, and close down Walmart? Would world population have to be controlled? How exactly would a gold standard work?

I do like to own gold, simply because it appears to retain value when nations fail badly, which is where we may end up if we don’t start working together. What do you think?

(1) “If we were on a gold standard it would appear we in the US would shortly have no gold?”

It depends on the form of gold standard. Most would not prevent borrowing to fund a trade deficit. That’s how wars get financed.

(2) “How exactly would a gold standard work?”

A gold standard could be constructed to run the world during normal times, much as it runs today.

(3) “simply because it appears to retain value when nations fail badly”

Sometimes yes. Sometimes no. Think of Executive Order 6102 signed on 5 April 1933, which criminalized the possession of monetary gold in the US. And the Kuwait people who kept their wealth in gold for that reason, to have it stolen as they fled from the invading Iraq soldiers.

There is no such thing as a safe asset in this world. All that remains certain are good deeds to our fellow men and women.

I guess that there’s nothing more to be done with Fred. Schiller wrote, “Against stupidity the very gods contend in vain.” Here we see it’s also true of ignorance from indoctrination. Fred recoils from fact like a vampire from a cross.

(1) “u have no support for your statement regarding the 19th century. The gold standard works. ”

Anyone who denies the 19th century’s the horrific depressions and massive bubbles (canals, railroads, etc) knows nothing of history or economics. Fred obviously didn’t click on the link given to see a detailed history. Or consult an encyclopedia. Or even Wikipedia.

(2) “Read the book.”

Ditto his statements about Road to Serfdom. It’s not possible to read it (even the first 20 pages) without seeing that its predictions have proven false in the 78 years since publication. Of course he doesn’t click on the link to my post that gives excerpts from the book.

(3) “Ben F. Adds nothing to the discussion. He went broke.”

Fred’s contemptuous dismissal of a great man with such wide experience tells us much about Fred. Franklin started with nothing and was a business success at age 27. He never went broke after that, and retired from business at age 42. At death among his bequests was £1,000 (big money then) in trusts for Boston and Philadelphia, to gather interest for 200 years. Fred obviously knows nothing of Franklin’s paper cited (obviously he didn’t click on the link to read what Franklin said).

Ditto his contempt for Krugman. If he’s typical of his type, Fred cannot accurately state any of Krugman’s theories (or Keynes, similarly). They are indoctrinated to know merely that these are bad guys, and everything they say is false. It’s a form of mental blinkers, least believers become exposed to new information and ideas.

More broadly, what people like Fred tell us about America

We see in Fred an example of the indoctrination that so many people have accepted. As we’ve discussed so many times, much of what they know is false — yet no amount of evidence will change their opinions to the slightest degree. Experts, no matter how famous and well-respected — even advisers to GOP presidential candidates and presidents (or, to the Left, climate scientists) — become fools and knaves to them when they question the doctrines of faux economics (on the Left, AGW).

There are legions of Fred’s, on both the Left and Right, for we’ve become a credulous and easily manipulated people. At some point this might become so large a factor that we can no longer govern ourselves. We might be near that point today.

There are many posts in which we examine in detail the views of people like Fred. Please advise if you’d like links.

We know enough by now to construct a workable monetary system based on a wide range of foundations. The difficulty comes during extreme conditions. Some, like war, usually require bending or breaking the rules (war is the source of most of the 20th C US inflation gold bugs rail against).

The big difference among monetary systems comes from their ability to handle shocks and other extreme conditions. What adjusts? Financial factors (eg, inflation, interest rates, value of the currency, etc) or the real economy (prices, wages, national income, jobs, etc).

I’ve often heard from gold reform people that, ‘Since the creation of the Federal Reserve, the value of the dollar has dropped 97%.’ No one ever adjusts that for average salary today vs. average salary in 1913. Anecdotally, my mother, who worked in NYC in the 30’s, used to tell me that she made “$15.00 a day. And that was good money!”

I think a better indicator would be what percentage of one’s salary an item is worth. So, for our hypothetical gal Friday in Betty Boop’s New York, a shave and a hair cut costs two bits. 1.7% of a weekly wage or .03% of a year’s salary. Let’s call that .0003 Anum, or 3 cents where a cent is one ten thousandth of one’s annual wage. Let’s call this the ‘Absolute price’ of an item. If today the jingle would be: ‘Shave and a haircut, 20 bucks,’ and the median income is $50,000.00, that same shave and haircut would set you back .04% or 4 cents. In this case the value of the dolor has gone down 30%, at least for things with catchy jingles associated with them. We should be able to do the same comparison with milk, rent, education, clothing, the cost of a playboy (sorry. Couldn’t resist) or any other good or service.

I understand this is simplistic and that there are other factors, such as extra taxes our Betty didn’t have to pay, changing lifestyles for which there were no analogs in 1930, distribution of income; which tends to skew the value for ‘median income,’ amount of debt sustained by individuals and states, etc., but it illustrates that money, whether gold, paper or blips in a computer, is merely an index of the perceived value of any commodity relative to all others. As the middle class evolved, mostly due to availability of cheap energy, the absolute price of items went down. For a hundred years the middle class’s income has been increasing, but so have prices causing the absolute price to creep up. Now we seem to be at the hockey stick portion of the curve. Woe to the Betty’s of the world.

The inflation is real. But our governments ran up massive debts during our 20th century wars (ww1, ww2, Korea, Vietnam, and the cold war). They had to be financed, and inflation was one way to do so. From 1945-1970 inflation erased about 1/3 of the federal debt (from memory).

It’s an interesting question if that was was the best policy decision. There is no way to find a hard answer. But the reality is that was the greatest period of growth in US history. Sustained growth without the depressions that marred other periods of growth. Not just growth in aggregate, but with falling levels of inequality.

Economic policy has to be graded on overall results. The gold bugs, as Pluto says, describe the US government management’s of the economy as a horror show. That’s a false picture, ESP of the post-ww2 picture — despite the inflation.

Jon brings another — and important — dimension into the discussion. We have had a long slow inflation since WWI. But there are two vital things to remember about that.

(1) Economic impacts are largely (not exclusively) about rate of change. Even 1% annual changes will drastically alter price levels after many generation, but the economic impact of that will be nil. And history suggests that low levels of inflation, such as central banks’ usual target of 2%/year, are better than risking bouts of deflation (which initiate destructive debt deflation).

(2) As mentioned above, to say that the period since WWI has had inflation does not mean that the economy overall did poorly. In fact since WWI the US has been one of the world’s great success stories. That’s a vital dimension of the story airbrushed out of our history by gold bugs.

FB, as krugman would say it, you are comical. cf, the quote above. You link a bunch of stuff, which you obviously don’t read yourself, then engage in personal attacks and generalizations that don’t support your mis-guided point. cf, references to “fools and knaves.”. Colorful, yes, but not helpful or supportive. Only annoying.

Funny how everyone who doesn’t buy what FB is selling is a manipulated people, or mental blinkers. More colorful talk that adds nothing to the discussion. Been watching too much television, FB. Yours is a closed mind.

Jonh, the quote about Philip II was directly from the piece cited by FB. The fact is that a gold standard works just fine. Many of the “papers” are attempts to supply volume instead of substance.

(1) You are probably a nice guy. Perhaps even smart and well-educated. But you’ve not offered the slightest bit of evidence to support your assertions. Just repeated big statements. And mockery, combined with contemptuous jeering at people whom are widely respected (that doesn’t mean you need agree with them, but your mockery tells us more about you then them).

On top of that, you display gross ignorance about basic aspects of economic history — specifically about the 19th century’s history of bubbles and depressions.

As I said at the start of comments, any facts and reasoning are welcome here. We’ll give it respectful attention. But you’ve given us nothing to suggest that you should be taken seriously.

(2) “Many of the “papers” are attempts to supply volume instead of substance.”

I believe your comments provide a strong basis to guess that you have not read these papers, and have no idea (not the slightest) as to their contents. you know they’re bad (crimethink), and that’s all you want to know.

Give us an example of this, about a substantive point raised in this discussion.

(3) “Funny how everyone who doesn’t buy what FB is selling is a manipulated people, or mental blinkers.”

Perhaps that comes from the evidence given in support. And that when questioned, I provide supporting analysis and material. Repeating “the gold standard works”, like a liturgy, doesn’t gain the same degree of respect. We’ve gone several rounds with Fred and seen nothing but jeers and big assertions.

(4) “More colorful talk that adds nothing to the discussion.”

Please, not another complaint about style. This isn’t Women’s Wear Daily or a comp lit class.

the quote about Philip II was directly from the piece cited by FB. The fact is that a gold standard works just fine.

“Fine”? As Krugman points out in the referenced quote, there were financial panics in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933 while the country was on the gold standard. What is your response to that?

It would seem either that the gold standard is not “just fine” or that those financial panics didn’t happen.

The stock exchange lost 50% of its value in one day in 1907. That’s stretching “just fine” a bit far. BTW, one claim is that the crash was halted by JP Morgan breaking the liquidity trap by pledging vast amounts of money en bloc with other wealthy bankers.The crash of 1929 initiated the great depression. That was categorically not “just fine.” Many financial analysts credit the gold standard with prolonging the depression because there was no JP Morgan willing to personally try to break the liquidity trap, and there was no way of expanding the money supply.

Those are some facts. Unless you claim they are simply not true and that the great depression never happened, your idea that “a gold standard works just fine” is refuted.

Paper Standard is the best idea that Bank – government Complex could ever come up with.
For banks it is issuing credit (end then collecting interest) without actually having money, for State is taxing taxpayers stealthy and blaming inflation on speculators. And all that had done for protecting working people of course.

And here come a whole bunch of Court Economists that provide theoretical base for all that highway robbery of working people. And sure, these “economists” are rewarded prizes in return for the service.

(1) Central banks are among the most conservative and slow to change institutions. Gold as a fraction of world central bank reserves has been falling for a long time, both from gold sales and and reserve additions in currencies. Central banks have been selling gold for a long time. To avoid depressing the price, the major nations signed the Washington Agreement (Wikipedia) in 1999 to coordinated and limit annual sales.

(2) “because fiat money systems have all failed historically?”

The era of modern finance (ie, since WWII) — including fiat currencies — has seen some of the fastest growth in human history. Describing this as some sort of horror show is crazy. That such views are so widespread shows that long and well-financed indoctrination can convince Americans of almost anything.

Also, almost everything can be described as “failing historically”. Nations, empires, democracies, monarchies, all monetary systems. All that lives, dies. More detailed analysis is necessary to draw useful conclusions.

Asian banks the last year have been buying up a lot of gold (it’s preferable to US debt). The growth you refer to, FM, is no longer sustainable. As you can see in the chart in the attached link, our Debt problems began with the elimination of the Gold Standard. Not only is it in our Constitution that Gold and Silver are the only recognizable money in our country but it is prudent. Also, Andrew Jackson got rid of the Central Bank.

Why do Central Banks all hold gold (including our own), and why do they continue to hold on to it?

Because, otherwise, there’s not much to do with it? It’s still valuable, so it’s not like they’re going to give it to the city of new york to make manhole covers out of!!

Money has been virtual since the Knights Templar invented the checque (and thereby took advantage of slow communications speeds to slightly expand the world’s ‘gold supply’) – the problems with banking are not the movement from a gold standard; in every meaningful sense we haven’t had a gold standard since 1150AD.

There are many causes of financial crises. The people who see gold as the answer to all financial crises are making the same mistake as the alt-med suckers who seek universal well-being as a consequence of a single nostrum. If you think about it for a second you’ll realize that there is no one single cure-all. Even if a gold standard cured one small aspect of financial mismanagement (OK, it’s pretty!) the search for a panacea is ridiculous.

Todd is right on, but the world is changing — fast. Inflation has returned the RMB (China’s currency) to near fair value. Their foreign exchange reserve growth peaked at near 50% in 2003 – 2005. It’s now zero. Their current account surplus peaked at aprox $400 billion in early 2008. Their foreign reserves have been flat since summer 2011 at aprox $3.2 trillion.

The inflation and money supply growth of the emerging nations may have kept the world out of deflation since 2008. If they’re turning to deflation and stagnant money supply growth, the world might be sliding into deflation. Watch this space!

Truth is, gold has been around for 6,000 years as a store of value. In contrast, paper currencies have come and gone (i.e., Serbia and Zimbabwe). A gold standard keeps everyone honest. The elimination of the Gold Standard is what has gotten us into the current debt crisis (which isn’t even close to being resolved). Investors like Jim Rogers, Nassim Taleb, and Marc Faber, all whom have a much better track record than Bernanke, will tell you that gold is a much more dependable store of value than money printed out of thin air.

Article I, Section 10 of the Constitution: “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”

The elimination of the Gold Standard is what has gotten us into the current debt crisis

No, debt has. That’s why they call it a “debt crisis.”

That’s a correct identification of the problem. But there is absolutely no indication that a gold standard would help prevent a debt crisis (after all, it didn’t during the great depression, when we were on a gold standard) – it’s as useful as putting your hat on backwards to solve algebra problems.

Hint: the problem with the debt crisis is: debt. Maybe worrying about debt and over-leveraging would be more productive than worrying about gold? Don’t make the mistake of assuming that a gold standard would somehow magically prevent over-leveraging. You can leverage gold, too, just like you can leverage real-estate! There is nothing inherently magical about gold that will make financial markets decide they’re simply not going to leverage it!

Marcus, if you look at a debt chart (can’t post links here), it’s obvious the growth of debt began with Nixon’s elimination of the Gold Standard. We were a nation for around 200 years without the massive debt we have now. China, and other nations, are caling for a gold standard.

@FM A quote from investor Bill Bonner (his book “Empire of Debt” is a worthy read):

“We are now in this period that started in 1971, in which the dollar standard, as a paper money standard, is on the way out. It’s not going to last forever. My guess is it won’t last for another 10 years. We’re in a period of orderly deleveraging, but when this period comes to an end we will probably see a period of disorderly deleveraging, which will mean the end of the money system. This will severely discredit the central banks and the larger money system.

Just because Bill Bonner said, don’t assume this will not happen! He’s a perma-bear. Like a broken clock, right twice a day.

Perma-bears are almost all smart and great writers. That’s necessary to retain an audience (or attract new readers after others leave) despite being wrong so often. It’s the same reason successful conmen are charming — it’s a requirement of the job.

So they are not useful sources of guidance! I find them useful for two reasons. First, always read some non-consensus smart people as an antidote to group-think! Second, new insights are found on the margins — not in the center. Perma-bears are great at finding interesting insights (data and analysis).

Maybe because the American people seem determined to prove more and more with each passing day how woefully and abysmally naive, ignorant, shortsighted, forgetful, oblivious, self-deluding, complacent, and gullible they are?

Instead of talking about establishing a gold-based currency, perhaps we would actually be better served by talking about establishing a gold-based discourse…the “gold” in this instance being facts, reason, intelligence, and the good of the people as a whole instead of the opinions, rhetoric, prejudices, ego tripping, magical thinking, wish fulfillment which seems to characterize so much of our discourse (political and otherwise) these days.

You are probably a nice guy too, FB. Maybe not. I don’t have a basis for a conclusion one way or another. But, either way, you have become boring, especially with statements such as these, that cause everything else you have to offer on this interesting topic to be lost:

“We see in Fred an example of the indoctrination that so many people have accepted. As we’ve discussed so many times, much of what they know is false — yet no amount of evidence will change their opinions to the slightest degree. Experts, no matter how famous and well-respected — even advisers to GOP presidential candidates and presidents (or, to the Left, climate scientists) — become fools and knaves to them when they question the doctrines of faux economics (on the Left, AGW).

“There are legions of Fred’s, on both the Left and Right, for we’ve become a credulous and easily manipulated people. At some point this might become so large a factor that we can no longer govern ourselves. We might be near that point today.”

There is another factor that probably needs to be considered here. It doesn’t really matter what is used for money (Marx was a gold bug to many peoples surprise)so long as the ownership of production is concentrated in the hands of a few, prices can be manipulated no matter what you do or use for money. That is why Marx always talked about seizing the means of production not about seizing the money supply. The answer was and always has been that the Government should control some(usually infrastructure) of the economy and leave the rest of it alone.

Also John K. Galbraith used to say you bascially had 3 options… defaltion,inflation,wage and price control.

It’s not a political thing, a matter of left or right. While Fred is probably a conservative (of some form), we see similar dynamics in the comments of posts on the FM website debating climate change issues. See these collections:

That obsession about the gold standard is peculiar. What many people ignore is that

a) The gold standard is, historically, a fairly recent phenomenon. Most countries adopted the gold standard only during the last quarter of the 19th century.

b) Before that, a form of silver standard had reigned supreme for centuries.

c) To work at all, a standard must be based on a metal that is relatively abundant (if too rare, it becomes impractical), and whose production grows to sustain economic growth (to avoid stagnation or long-term deflation), and whose availability must not vary wildly (otherwise economic instability ensues).

d) For a long time, silver fulfilled those requirements, gold did not. The silver standard was abandoned largely because of wild swings in production following the independence of Latin America.

e) Gold became practical and economically possible because very large deposits were found in California and Australia towards the 1840s-1850s, then in South Africa towards the 1860s-1870s, then in Canada towards the 1890s.

Since 1980, both US stocks and bonds have outperformed gold and silver.

Yet, if you look at the charts the gold collectors publish on the web, they are wonderful examples of doctored statistics. “Gold outperformed Berkshire Hathaway in this century” (never mind that BRKA kicked ass like godzilla from 1967 ($16/share) till 2000 ($50,000/share) Boy am I glad I had all my money in Cisco from its IPO until I rolled my winnings into BRKA in 1997 right before the tech stock dive. BRKA’s only nearly doubled since 2000.

Gold? I don’t even see gold in my rear view mirror anymore. But gold-diggers can pat yourselves on the back: at least you didn’t buy Facebook. Did you?

This goes to the fallacy I mentioned earlier — Small annual inflation does produce large changes in the price level over a century. But there is little basis in theory or history to state that the post-WWI inflation has damaged the US in any way.

The hysterical comments that a dollar is now worth a dime, or whatever, are just empty rhetoric.

Also, it’s difficult to determine if this inflation was or was not the best means to help pay down the debts from our wars. Would higher taxes or tariffs have been better? No interstate highway system or GI bill?

There was one period of painful inflation. Inflation got out of control in the 1970s for several reason. The two major causes:
Mismanagement of the financing for the Vietnam war, and
using excessive monetary easing to offset the rise in commodity prices.

what used to cost a dime now costs you a quarter. and you only get a half dozen.

You need to look at thinks like federal minimum wage adjusted for inflation, or any earnings and costs adjusted for inflation. You’ll find that things like the cost of oil (which is actually a result of US’ prices being artificially low) pull the numbers up but, otherwise, it doesn’t make any difference if you make $1/hr and something costs a $.10 or if you make $10/hr and something costs $1.

What you’re doing is the same thing my grandfather did: he’d see that a pair of jeans cost $40 and he’d freak out because he remembered when $40 was a good week’s take-home pay (in the 30s). Once you reminded him that pay had scaled up to more or less match, he would calm back down. He had alzheimers’, so he had an excuse for making such a basic error. What’s yours?

Inflation got out of control in the 1970s for several reason. The two major causes:
Mismanagement of the financing for the Vietnam war, and using excessive monetary easing to offset the rise in commodity prices.

That’s a common misunderstanding. Inflation is a rise in the general price level. A rise in one sector’s price cannot rise the general price live by itself, since people don’t have more money to buy the same amount of goods all at higher prices. Only if the central bank responds to the event (ie, oil price rise) with monetary easing — as they mistakenly did in the 1970s — does inflation result.

What happens if there is a price rise without monetary easing? People spend less on everything else, including debt payments. The economy slows, perhaps into debt deflation. I forecast this in 17 June 2008 (oil peaked on 3 July 2008 at $145) — as on this post, to bitter comments that this aspect of basic economics was impossible — and that inflation was inevitable. A few months later: the economy slows, loan defaults rise, and a fast spiral down just like 1929-32. Fortunately this time the government responded quickly, avoiding another depression.

You’re fighting to no avail. You’re on an anonymous blog, take it as such and just use it as an information source. If you don’t like his analysis then stick to yours; no one’s saying you can’t. I’ve a couple these arguments with him myself on certain topics and let me tell you from history that he is a very intelligent individual and is near impossible to convince without many secure sources (so have them on had!).

Which begs the question Fabius: Is there just one of you who answer these comments or a group? Also, whether a group or not, what are your/y’all area(s) of specialty? (PhD, masters….?)

There is a reason for this: the debates on the FM website usually focus on very narrow topics, on which there are clear answers.

The history of gold standards is very clear. oddly, nobody has pointed to newer gold standards, which might not have the problems of traditional gold standards. As I’ve said, a monetary system can be built on a wide range of foundations. To work it just needs to have a mechanism to adjust to changing circumstances.

Another example, climate change. The position of articles here is that there is a debate among scientists about key aspects of climate. Most especially, causes of past warming and forecasts of future warming. That’s pretty safe ground.

There have been debates on more controversial ground in the past, such as forecasts that we would not achieve our objectives in Iraq and Afghanistan.

When we discuss broader subjects, I usually express my opinion as a guess. Like in February, that McCain will win. So disagreement is met with “you might be right”. There’s lots and lots of those posts, but their discussions are probably not as memorable.

This is a fascinating point. I seldom discuss internal dynamics of the FM website, but since it’s on the table.

My perspective is that many of the comments posted are IMO amazingly aggressive about the narrow fact-based posts that comprise most of our content.

The posts about the wars, the use of torture and assassination — these are matters of values. While I am horrified that do many Americans advocate war crimes for which we executed people after WW2, I understand that such debates cannot be resolved. Values can be discussed, but there is no way to prove one over another.

Gold is down year over year. Spot gold was aprox $1,850 a year ago. It’s aprox $1,700 today. Per Kitco

This kind of short-term price action is mind-numbingly irrelevant to the use of gold as a monetary rule. Sometimes gold goes up; sometimes it goes down (as it a lot in the decade after 1980). Neither you, I, nor anyone else know what the price of gold — or any other commodity — will do in the future.

It strikes me that the desire for a gold standard is a mere proxy for the desire to see fiscal responsibility in government. Longing for a gold standard (and the imagined benefits it will surely bring) is not simply cargo-cultism as it appears to be, but rather an expression of deep emotional discomfort with the degree to which monetary policy is not and never has been anything but a privilege of power. When the people are shorn too deeply, they rightly complain and they wish they could have some say in what happens to the value of their work – and some of them hit on fixing the value of money as a way of having that say. What they don’t realize is that they won’t ever be allowed to have a say, at all, whether the money is tied to gold or not. The problem is bad government, wasteful government, government that is in cahoots with bankers, and bankers that manipulate government – not, specifically, the basis for money.

In other words the disempowered gold standard-bearers have got cause and effect backwards: they think that if they can control money, that it’ll maintain its value, when the real problem is that they cannot control their government and they are emotionally incapable of confronting that fact across the board. Not only can the people not control the government’s fiscal policy, they can’t control its starting or stopping wars, what projects it spends the people’s money on, what secret alliances it makes, etc, etc. That the government is able to print money at will is worth worrying about, but it’s like worrying about the color of the bumper on a freight-train that’s bearing down on you, when you’re tied to the track. I suppose it is, indeed, worth worrying about but it misses the larger point.

I see the people who worry about the gold standard as similar to the people who worry about details of the various political parties’ stated platforms. Those details are there so that the victims will focus on those pointless details and miss the big picture: that you’re going to get screwed, and then you’ll get screwed again, and there’s nothing on earth that will stop it. Oh, and after that? You’ll get screwed again. And again.

Barry Eichengreen pointed out in “Golden Fetters: The Gold Standard and the Great Depression 1919-1939,” that once countries had shed their golden fetters policymakers had several new policy options available: they could expand the money supply , they could provide liquidity to the banking system at the first sign of distress or they could increase the level of government expenditures.

Today we may be suffering from fiat currency fetters. I would argue that a major unstated reason for the dramatic fiat policy initiatives of the past 4 years was to preserve our contemporary structure of power (the interpenetration of the market and the state) as well as to try and prevent a more serious deflation.

Based on my research, the historical origins of this fiat policy and the historical origins our modern structure of power originated in the 1861 to 1863 period when the Greenback was created due primarily to the Civil War. In 1863 the National Bank Act created a national banking system that abolished locally chartered banks, and basically nationalized the currency (see Richard Bensel “Yankee Leviathan: The Origins of Central State Authority in America, 1859-1877).

Federal authority then gained control over financial flows and the Union placed a large part of the national debt with financial capitalists. This initiative on the part of the State forged a powerful link between private capital and the emerging Federal Government. The dramatic expansion of the government bond market created a powerful client group (finance capital) which now had a vested interest in the State as well as the State, in turn, having a vested interest in the welfare of finance capital.

Of course by 1879 the pure greenback standard ended with the U.S. Going back on the gold standard but, perhaps, an important precedent had been set for our modern crisis—a crisis caused by two social partners (Big Capital and Big State) that were just beginning to develop some common interests in the early 1860s. (See also writings of Eric Helleiner and Kathleen R. McNamara).

It has appealed to me because of the two big economic crises of my adult life- the dot com bubble and the housing bubble. I imagine those who had money in the 1970’s would just say “inflation”.

I think the victims of both the dot-com and housing bubbles felt pressured to buy in, due to low return on bonds. (And also the adoption of 401k/s, mortgage interest deduction, and financial deregulation in general. Nothing to do with our system of money but is still the government’s fault if you are burned by it).

With a gold standard, it would be difficult to create money, so its price, the interest rate, ought to be higher, so a saver would have options besides ones that have recently resulted in disaster.

This isn’t necessarily good reasoning but I’m pretty sure this is a widespread view.

Anyhow, with today’s financial tools, anyone who is convinced the government is keeping the price of anything artificially low/high/whatever can try to profit from it rather than complain.

Perhaps the question is “What is money worth?” With a Gold Standard, paper is attached to something of intrinsic value. When that’s taken away, what determines how much the paper is worth? The Gold Standard is a much more disciplined and honest way of administrating a money supply than the current model.

If that’s your only standard, then you are correct. Kind of tough when your inflexible standard prevents recovery from a shock. Most people consider the human devastation of busts and depressions a problem, but not everybody does. As I said in today’s post, that experiment has been tried repeatedly and there is little enthusiasm to repeat the test.

Ideologue: An adherent of an ideology, esp. one who is uncompromising and dogmatic.

slabinja,
you are about to discover the big lie of gold. What is it worth? How is that measured? In dollars!!! you can’t get away from that because money is essentialy the Price!!!of something, that is why it dosen’t matter what you use for money because it will always follow some type of a pricing mechanism. Except in the case of the modern world gold has a utility value, it can and is used in electronics, medical devices,etc. so one of the by products of switching to a gold standard would be a dramtic rise in price (assigned in dollars) because alot of gold could not longer be used in products for mans survival but would be sucked off the market and stored in some vault somewhere.

So, slabinja, what you’re implying is that the Gold Standard acts as an economic chastity belt.

It’s apt, because the Gold Standard as an understanding of the economy is much the same as a chastity-belt-imposing society and its understanding of sexuality.

There is enough of an economics knowledge tree across time and space to have an understanding of how money works. And many societies have evolved beyond the need for money being tied to a store of gold.

It has very little to do with discipline or honesty, or the much higher standard of chastity.

The functions of money are a store of value, a medium of exchange and a unit of account.

Money is supposed to be a note that a bearer can theoretically lay a claim to something else vaulted in the store. Something like gold. So every economic actor has a choice of using the money to spend on a good or service, or making a claim to an amount of gold (a store of value in its own right).

The thing is, anything with value can serve as a store of value. So, theoretically, a nation could offer a substitute of value if it didn’t have a vault of gold. Japan has been barren of gold mines, but it could remedy that problem by printing notes that allowed claims on silk. Saudi Arabia could do the same with oil. Agrarian countries could do the same with silos of grain.

Money is also a medium of exchange, something that could be used knowing it is widely accepted and widely available. The latter is important, because the velocity of money is important to carrying out transactions. Gold, especially, has the problem of being too valuable for its own good and it would make it more valuable to hoard than to trade.

@slapout9 … what is it worth? dollars.
that’s a bit of a strawman. it is also measured in euros and swiss francs. and also currencies of the future, should there be any changes. Think of gold, and all other assets too, as a link between currencies of the present and currencies of the future.

The origin of money (paper) is to represent something of real value. It appears more prudent to believe that value will be stored in something tangible (gold) than something that can be printed out of thin air. Seems pretty simple.

To quote Richard Russell (Dow Theory Letter),

“It is well known that the Fed despises gold, because gold is out of the of the Fed’s control. Furthermore, gold competes with the Fed’s own fiat currency. The value of gold never changes. What changes is the number of dollars that are required to purchase a specific quantity of gold.”

and: “Gold possesses some properties that are beyond the scope of other investments. Gold can’t go broke, because gold does not derive its purchasing power from the edict or control of any sovereign power or central bank. Gold has no counter-parties. Gold is tangible and is accepted everywhere — in good times or bad. Gold exists outside the world’s banking system. Unlike fiat money, gold is wealth on its own. “

“The origin of money (paper) is to represent something of real value.”

That is not correct as either a statement of the past or present.

Money originated as a medium of trade (this is a relatively new discovery by historians, but now there is large body of data on the subject).

And that’s it’s primary purpose today. That has been known for centuries (shown by the works I cited by Ben Franklin, John Locke, and Newton). This was even more strongly re-established by the re-creation of monetarism by Milton Friedman.

If you buy an ounce of gold today and you hold it at hundred years, you can go to it every day and you could coo to it and fondle it and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years. (…)

Why do you think gold bugs get so irate? Because they really do come out. If you go on CNBC and say that bonds are kind of a poor investment, people don’t get mad at you. You don’t hear from the Treasury. You can knock almost any investment and nothing happens. But when you talk about gold it’s different. Of course that says something about their motivation for ownership. They want people to agree with them. They want everybody to get so scared they run to a cave with gold. Caves might be a better investment than gold. At least they’re not producing more caves all the time. So they want people to be as afraid as they are. Incidentally, they’re right to be afraid of paper money. Their basic premise that paper money around the world is going to be worth less and less over time is absolutely correct. They have the correct basic premise. They should run from paper money. But where they run to is the mistake.”

Buffett’s problem with gold is fundamental: Possession of it is unproductive in itself. And the second paragraph shows gold to be a Rorschach test for gold bugs.

Paper money, by the way, isn’t the only thing that devalues over time. Everything does, and it’s a fact of life. Do gold bugs stress about electricity the same way because light bulbs and machines become worth less over time through use — and eventually stop working? Do gold bugs abstain from eating because food is a suboptimal use of money and time — food rots when left alone, only generates nonproductive waste (well, very few people have a want or need from reclaiming productive elements from the waste :> ) and you have no idea whether the nutrients are doing anything beneficial for your body.

This post will probably baffle readers because they need some knowledge of basic economics to understand, for example, why price deflation would result if we switched to the gold standard under current circumstances.

Wad’s assertion that “everything devalues over time” is provably false. It also shows a fundamental ignorance of basic economics. Some items rise in value over time; others fall. Items which rise in value over time include rare wines, one-of-a-kind pieces of art, exotic rarities like Stradivarius violins and Shakespeare first folios. Items which fall in value over time include common items like cars, furniture, household appliances, etc. An odd thing happens, though, if enough time passes: even the commonest household items will start to rise sharply in value if enough time passes. For example, a roman cup in good condition commands quite a price today.

Applying scientific principles like entropy to economics always fails. Economics is not a science, but a branch of politics with mathematical aspects: economics was originally called “political economy,” and was better named then than now because that name captures the essential and unpredictable human characteristics of economic interactions. Science posits natural laws which are invariant and logical; political economy results from the emotion-driven behaviour of human beings, which varies quite a bit and and is often thoroughly illogical.

I really do wish high schools taught at least one watered-down course in elementary economics. Most people have no concept at all of even the most rudimentary aspects of economics, such as Say’s Law, or the Ricardian Vice, or the Philips curve, or the distinction twixt nominal and real interest rates. As a result, posts like this whiz right over most readers’ heads.